The FinReg battle: The next two years

By Mike Konczal

Dave Dayen, noting that the financial sector is starting to breathe a sigh of relief over how much it is getting away with, starts to consider what "the blueprint for what the response should look like in the next crisis" here, and Chris Bowers does the same here.

A lot could still happen in either direction this week, but let's talk about the medium term in this fight for financial reform. Given where progressives are, I think it is best to think in terms of specific battles where it is likely they'll both win and where they'll be able to do the most in terms of serious reforms of the financial sector. I see three battles in the next two years that will happen regardless of a double-dip financial crisis.

Though I'm mentioning progressives, much of this will appeal across the entire political spectrum. Because these fights aren't for fun or grudges. If we have another financial crisis within a decade, it will probably permanently wreck the wealth and happiness of a generation of Americans and perhaps even a generation of the world; this isn't a game.

Here are the three ways to proceed...

Financial transaction tax/bank tax
Nancy Altman and Eric Kingson at Nieman Watchdog ask this: "If the press doesn't ask tough questions and stand up for the little guy, the powerful interests stacking President Obama’s deficit commission will use it to cut the social programs that most help the middle class and the vulnerable." The government has decided to start investigating raising revenues and cutting benefits. We will see if we have a bank tax to recoup TARP by then (I am not holding my breath) but a graduated tax on non-deposit liabilities and/or a financial transaction tax must be on the table.

It will obviously raise revenues, and, given that a lot of our problems right now are a result of a financial crisis, if a financial sector tax can reduce the chances of said crisis that's even better. Arguments need to be built and deployed about how things such as high frequency trading provide a weak or even counter-productive form of liquidity and how more liquidity is not always necessarily better, and about the fairness and distributional effects of having a select group of businesses located on the exchange squeezing pensions for pennies on the dollar, milliseconds at a time.

Ultimately a moral argument will come into play: If the working poor need to pay more for bread and milk through a consumption tax like VAT certainly the richest in the financial sector should also chip in given how well those working poor taxpayers and the Federal Reserve protected them when they were most vulnerable. It's difficult for me to think someone with progressive sensibilities would not be sympathetic to this statement, and I would hate to be a moderate centrist who doesn't realize this will have powerful resonance among the American population.

GSE reform
This is the can that we just keep on kicking, but it is coming. Certain things that don't get through the final financial bill may move when the time for the government-sponsored enterprise reform comes. In particular, securitization reform might be able to get somewhere closer to where it needs to be., and there may even be movement on reforming to bankruptcy law.

The American homeowner will continue to bleed out for the next two to three years, regardless of how lost this decade becomes; between that and high unemployment, anger will remain high, and I expect GSE reform to be not a little technicality but instead a major battle. It's important to understand how to create fencing around the housing market that will allow people to build wealth without locking in any of the worst parts of the U.S. housing market of the past decade.

Did it work?
There's a chance that this bill might work. But what if it didn't? It's important to be able to detect (a) how this bill is failing over the next several years and (b) get attention to those issues.

The most obvious problem would be if the market finds resolution authority non-credible and starts lending to the five biggest firms as if they had a permanent government and Federal Reserve backstop. Wall Street certainly thinks 2007 was the right way to be, and the government had to step in there. If they continue to grow, and we can make the argument that there's an implicit Too Big to Fail subsidy, then we can credibly claim that the actions of the 2008 bailouts created five brand-new Fannies and Freddies -- five new GSEs that the government will have to take pains to make sure the creditors never take a haircut.

Avoiding this dystopia is one of my main reasons for supporting the SAFE Banking Act, and there isn't a "double jeopardy" problem with that amendment -- it can be reintroduced, with more urgency if the biggest players are growing in size and recklessness.

The next thing to watch is whether derivatives are reformed, and how much the laws are gamed in general. Will Goldman Sachs drop its bank holding company status, add a 20 percent non-financial wing and declare itself an end-user, and whatever other complicated acrobatics the lawyers are dreaming up? That all depends on the wink-winks that the regulators will give, and we will never see those on the outside. All we can do is watch for the effects.

All of this is on the two-year time frame. But it's all I can see from my vantage point. Where are some other places real reform can be moved through?

Mike Konczal is a fellow at the Roosevelt Institute. He blogs about finance, economics and other topics at Rortybomb and New Deal 2.0, and you can follow him on Twitter.

"Certain things that don't get through the final financial bill may move when the time for the government-sponsored enterprise reform comes."

Why? If financial reform measures can't get past the lobbyists now, why would they win out next year? Or the year after? Public pressure isn't going to be any greater then than it is now unless there's a second crisis attributed to the banks. All of these measures you're talking about might be good ideas, but if they're not viable now in the wake of the deepest recession for decades, I don't see why they're going to become viable in 2 years' time.